Citi goes bullish on miners for the first time in three years

And with that, analysts at Citi moved their 12-month view on the mining sector to bullish for the first time in three years.

Sure, they\’re concerned about the potential for long-term structural demand for commodities in China, and yes they\’re aware there could be a seasonal slowdown in the first quarter of this year (as they pointed out in December), but analysts are seeing better bottom-up fundamentals, notably from big diversified miners. Citi\’s top picks are BHP Billiton
, Rio Tinto
and Glencore-Xstrata
.

\”Investor sentiment has hit rock bottom. The mining sector has moved through five stages of grief, namely Denial, Anger, Bargaining, Depression, and now we think we are in Acceptance that the sector has moved into a new norm,\” said lead analyst Heath Jansen, in a note out Thursday.

Amid a clutter of metals-price calls, Jansen foresees a flat commodity-price environment ahead and a reduction in volatility. An improvement in U.S. and European growth will help boost commodities, while weakening commodity currencies — the currencies of major exporters like Australia, New Zealand and South Africa — are boosting miners, he said. On top of all this, miners are cutting costs, improving balance sheets and aligning with shareholders\’ interests. Because of this, earnings momentum has become positive.

But Citi\’s advice to stay underweight on gold and base-metal stocks diverged from the opinions of other big investors. DoubleLine Capital founder Jeffrey Gundlach said earlier this week that not only is gold looking good technically — calling for $1,350 an ounce on gold \”sooner rather than later\” – but he likes those miners as well. Most major gold companies lost at least half their value last year on the gold price plunge.

\”Sentiment is as black as night on gold, so I\’m actually long on some gold miners,\” said Gundlach.

His gold call is more bullish than the average investment bank so far this year. Recent forecasts from six big banks (not including Citi) see the metal sinking to $1,209 an ounce this year, an average drop of 14.5% from the 2013 average. The gold-mining sector has a fan in hedge-fund manager John Paulson, who was reportedly telling clients last year that he won\’t add more to his hard-hit gold fund, but still likes the miners.

For its part, Citi said its least-favored big-cap miner is Anglo American
. The investment bank parted company with UBS, whose analysts lifted the stock to buy from neutral, saying valuations are looking attractive after a recent underperformance (by more than 18% over the past three months compared to buy-rated Rio Tinto and BHP Billiton).

Writing for Benzinga on Wednesday, William Briat said now isn\’t a bad time to go hunting gold mining stocks, which are nearing lows not seen since the fall of 2008. He advises looking for stocks that \”are able to produce at an all-in sustaining cost that is below the current price of gold bullion, which means they remain profitable.\”

While Citi\’s note is focused on Europe\’s mining stocks, Briat outpointed NYSE-listed Primero Mining
. \”If a company still has strong assets, a solid balance sheet, and is able to create positive cash flow, this type of firm is of interest to me, especially when market sentiment is so negative,\” he said.

Marc Faber extolled the virtues of mining stocks at the close of 2013. The author of the Gloom, Boom and Doom report said that given the extremely bearish views out there on gold, silver, platinum and palladium, mining companies are at \”relatively good values.\” Not a new call here for Faber, he\’s been touting miners for a while.

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